Wages of disinvestment

Wages of disinvestment
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First Published: Thu, Oct 21 2010. 10 20 PM IST
Updated: Thu, Oct 21 2010. 10 20 PM IST
After higher-than-expected proceeds from the 3G (third-generation) auction process, the government is now expected to rake in more funds than it had earlier anticipated from disinvestment. According to a report in the Business Standard, disinvestment proceeds could amount to Rs59,000 crore, way higher than the budgeted amount of Rs40,000 crore.
What’s more, direct tax collections have risen by 19% to Rs1.82 trillion and indirect tax collections have risen by 44% to Rs1.51 trillion. Besides, agricultural growth is also likely to be strong this year and nominal gross domestic product growth should be higher than the government’s target of 12.5%. The borrowing programme has already been cut and the 3G and wireless auctions have helped the government fund the first supplementary grant amounting to around Rs50,000 crore. On one hand, this is positive since the fiscal deficit can certainly be contained at the targeted 5.5%, if not reduced a bit.
But the buoyancy in revenues also means that the government won’t be under any pressure to contain expenditure. On the contrary, it is likely to get even more reckless with its expenses. But before loosening its purse strings, it must keep in mind that some of the income in this fiscal year, such as the proceeds from telecom auctions, is one-off in nature. Besides, disinvestment proceeds would exceed the government’s original target only provided liquidity and investor sentiment continue to be as high as they currently are.
In fact, it could well be that large issuances by Indian Oil Corp. Ltd and Steel Authority of India Ltd, planned in the fourth quarter, may not take off if the markets start correcting. Keeping these factors in mind, it would be better for the government to be prudent about its expenditure. If indeed it’s able to garner a higher-than-anticipated sum from disinvestments, it would do well to carry forward these funds to the next fiscal year. Particularly so because the global economic recovery is losing momentum and India’s own growth in the next fiscal year could be affected if global growth slows down further.
Another fallout of the buoyancy in the government’s revenues this year is that it is now under no pressure to bring further reform in oil and fertilizer subsidy. Earlier in the year, when the fiscal deficit position was dire, some concrete steps were taken on fertilizer subsidy and there was the possibility of radical action on oil subsidy. While things may look good in the near term, the long-term health of the economy should not be ignored.
How will these large proceeds affect state spending? Tell us at views@livemint.com
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First Published: Thu, Oct 21 2010. 10 20 PM IST